Rent to rent is one of the emerging property strategies for people who want to invest in property without spending too much money. But what exactly is rent to rent? The clue is in the name, however, there is a lot more to learn about this strategy than simply renting a property.
Rent to rent is the strategy, where you rent a property from a landlord and then rent it out yourself to a tenant.
Effectively, you are taking control of the property and acting as if you are the landlord, while paying the landlord a guaranteed rent, which is usually lower than what you are charging your tenants. Please note that all the maintenance, refurbishment costs, bills and void periods are your responsibility.
Types of Rent to Rent
For savvy entrepreneurs looking for a way to generate consistent cash flow from property and achieve financial freedom, rent to rent is a great business model. There are three rental strategies to use for your rent to rent portfolio.
House of Multiple Occupation (HMO)
If you find a property with 3 or more bedrooms, you can convert it into a HMO and make money by renting the rooms out separately, which will yield higher than a single let.
This is the most popular rent to rent strategy, as it can generate a high monthly income with great returns on your investment. Remember though, HMOs need a lot of management and you need to be aware of set-up costs and regulations if you need to convert the property.
Serviced Accommodation (SA)
Serviced accommodation just means renting the property on a short-term basis, usually to business travellers or holidaymakers, depending on the location. The property should be fully furnished and sometimes with additional services, such as cleaning, breakfast. etc.
The workload is similar to that of a HMO, meaning that you are responsible for the management and all the costs. It is important to say, that if the property is a flat, short-term rentals are likely to be a breach of the lease.
The difference between single let and HMO or SA, is that you need to rent the property on market rates. This means, that you need to negotiate the rent with the landlord. If they agree to accept less that the market rent for you, and you rent the property at the market rent, then you’ll make a profit.
Single lets is by far the simplest and easiest of the three, mainly because the returns are not as high as with the others.
What are the Benefits?
Rent to rent is still a niche property strategy, but it’s a ‘win-win’ situation for all parties involved. We’ve listed the benefits to yourself and the landlord below.
Benefits for you:
- Little money required to start
- No need for mortgages
- No deposit
- No legal costs and stamp duty
Benefits for the landlord:
- Guaranteed rent
- No effort
- Passive income
The Drawbacks of R2R
As we mentioned before, rent to rent is an excellent strategy, if you want to get involved in property but have limited cash to invest in. However, it is also important to be aware of the drawbacks.
No Capital Growth
Capital growth is one of the huge benefits of investing in property. Since you don’t own the property, you won’t benefit from its value increase over time. However, if you are looking for a way to get started or want to save some money to start your own portfolio, rent to rent is a great strategy to generate an income.
Responsible for all the Costs
What is a benefit for the landlord, could be a drawback for you. Rent-torent means that you are responsible for all the maintenance costs, bills and void periods, making you exposed to the risks of property ownership. So, if there are void periods in the property, you will still need to pay the landlord.
Don’t own the property
While you manage the property and have control over when to rent it and to whom, the property is still owned by the landlord. So, if the landlord fails to pay the mortgage or decides to take the property back, you’ll need to find another property to invest in.
How to Find R2R Opportunities
While R2R completely removes the hassle from the landlord, many might find this strategy unsuitable for them. This makes finding deals a quite difficult process and sometimes you’ll need some negotiation skills to convince them to rent their property to you. Below, we have listed the most successful ways of finding rent to rent opportunities.
Approach Lettings Agents
Letting agents already spend a lot of money and time to attract landlords, so you can easily find suitable properties if you ask them or browse their website.
Another great way of generating leads is to advertise for free on sites such as Gumtree, or find relevant groups on social media and make a post outlining all the benefits of your offer.
Find properties outside of city or in the town centres. In addition search for article 4 areas and areas where holiday rentals are weaker but corporate is high. Then, contact the vendors directly.
Our huge network of franchisees provide us with new opportunities every day. Download our Property Investment App or contact us to find out how to fully access our network of sourcers.
Analysing a Deal
Now that you have started generating a list with a few prospective deals, it’s time to assess those deals and find the most profitable one for you. Below, we have summarised everything you need to do when assessing a rent to rent property.
Before agreeing on a property, make sure to check the demand in the area. If you are looking to invest locally, you might already know the hotspots for HMOs and SA, but you could also ask local letting agents or visit websites, such as Spareroom and AirBnB, to check both supply and demand for rooms.
How Much to Charge Your Tenants
- For single lets, you’d need to find the average market rates for similar properties.
- For HMOs, check how much other landlords in the area charge per room to find the total rent for the prospective property. Bear in mind that the rent will be higher for double or en-suite rooms.
- Finally, for SA properties, find out what other people charge, depending on the location, time of the year etc., so that you can work out your rent.
Calculate Your Net Income
The third step is to calculate your net income and see if it’s worth investing in that particular property. To do so, you will need to deduct all the costs included in the management of the property. Then, you can determine if the net income is what you are looking for.
Work out the Timescale for Making a Profit
Finally, once you know how much you need to spend on the property each month, it’s time to work out your payback period. In the beginning, you’ll probably need to spend more on furnishing or refurbishing the property, so it might take a few months before you start generating significant profit.
How to Get Started
The biggest stumbling blocks of rent to rent, are learning about the strategy and finding deals. So, although there are lots of other things to think about, such as negotiation, marketing, agreements, etc., make sure to work on developing a system to generate leads and educate yourself on rent to rent. When you join Sourced Franchise, we can assist you at every step of the process:
- We’ll train you in rent to rent and share our tips and tricks
- You will be provided with many off-market property leads
- Our database of investors and franchisees will be available to you for finding properties, investors and learning from their experience.
To find out more about our franchise opportunity, download our prospectus now!